DOL Revises Independent Contractor Classification Under the FLSA

Jan 18, 2024

The United States Department of Labor (DOL) recently released its final rule on the classification of workers as employees versus independent contractors under the Fair Labor Standards Act (FLSA). The new rule rescinds the DOL’s 2021 Independent Contractor Rule and implements an updated version of the multi-factor “economic realities test.”

The DOL’s new rule is its latest attempt to provide clear guidance to businesses and reduce what it calls the “prevalence and harms of misclassification.” Those harms may arise because independent contractors are not eligible for benefits like employer-sponsored fringe benefits or the mandatory minimum wage and overtime pay afforded to non-exempt employees by the FLSA. However, the FLSA does not define the term “independent contractor.” In the absence of any definition, courts have held that the determination that someone is an independent contractor is whether, in terms of the economic reality of the relationship, the worker is economically dependent on a particular individual, business, or organization for work (thereby distinguishing them as an employee) or operates their own business independently (qualifying them as an independent contractor). The new rule reiterates that a worker cannot be considered an independent contractor when they are economically dependent on an employer, and the rule provides six factors to assess such economic dependence. The factors include:

1. opportunity for profit or loss depending on managerial skill;
2. investments by the worker and the potential employer;
3. degree of permanence of the work relationship;
4. nature and degree of control;
5. extent to which the work performed is an integral part of the potential employer’s business; and
6. skill and initiative.

Under the 2021 rule, two core factors— the nature and degree of control over the work and the worker’s opportunity for profit or loss—carried greater weight. The new rule differs in that it adopts a totality-of-the-circumstances economic reality test where no single factor (or set of factors) automatically determines a worker’s status as either an employee or an independent contractor.

The new rule will take effect on March 11, 2024. Nonetheless, employers should note that the new DOL rule does not determine whether a worker is properly classified under other federal or state laws. Agencies such as the Internal Revenue Service, National Labor Relations Board, and Ohio Bureau of Workers’ Compensation, among many others, apply their own tests to determine worker status, and the DOL has indicated that an individual could be an employee for FLSA purposes but an independent contractor for tax and other purposes. Employers should take care to analyze their contracts with workers to avoid misclassifying an individual under the new DOL rule and other applicable laws.

K|W|W attorneys will continue to track this development. If you have any questions about the new rule or other FLSA compliance matters, we encourage you to reach out to any K|W|W attorney. At K|W|W, your workforce is our priority.